KC Fed: Wealth Effect in Farming Leading to Debt Accumulation

American farmers may be approaching a historic bust just as bad of the agricultural collapse of the 1920s and 1980s.

Prices of farmland have been going through the roof and farmers have been investing more money in land, equipment and buildings. As they put more money into everything from irrigation systems to grain bins, they're taking on more debt, using their farmland as collateral.

Farm investment since 2006 has risen faster than anytime since the 1970s farm boom, a report from the Federal Reserve Bank of Kansas City shows.

Many worry that farmers will repeat mistakes of the 1970s and take on too much debt. If profits and land values fall, many overleveraged farmers might have trouble meeting loan payments.

"This scenario could be a recipe for another financial crisis in U.S. agriculture," warn Kansas City Fed researchers Jason Henderson and Nathan Kauffman in their report.

Agriculture has seen many boom-to-bust cycles, including boom years in the 1910s, 1940s and 1970s. Like clockwork, farm investments accelerate near the end of each boom and farmers take on more debt.

"History has shown that significant increases in farm leverage can set the stage for deleveraging cycles and farm busts," the Fed economists point out. "Whether the current farm boom simply fades — or busts — will depend on how farmers finance their investments and how far leverage rises."

Farmers are also worried.

"I think we have to be worried about this in a big way. We face lower incomes, inflated land values and rising costs to farming. We have plenty of reasons to be worried," Indiana Jim Schriver tells CNBC.

"I remember the 80s, and it was a bad time," he adds. "Land values went south, and a lot of farmers were in debt. There were a lot of bankruptcies from overdue loans that couldn't be paid."

"This could be very painful for farmers," Blake Hurst, a corn and soybean farmer in Missouri, tells CNBC. "I do expect things to get worse. We face a grim future."

The U.S. Department of Agriculture predicts that farm profits will drop 25 percent next year due to a decline in commodity prices and exports.

Plus, costs for farmers have increased substantially.

"Not too long ago it took $400 to grow an acre of corn," Schriver explains. "Now it's $1,000. A bag of seed was around $35 to $40 an acre. Now it's $245 or more. It's getting very expensive to farm."